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Friday 23 March 2007

Averaging Down - Yes or No?

Averaging Down was talked about in Gurufocus here.

Here are my comments.


I have a slightly different view.

Averaging down is good. Even I have averaged my stocks down to reduce my holding cost. But there are certain things that one must take care of.

1. The company you have put your money in should be fundamentally a good company and price fall must be irrational (not logical - YES NOT LOGICAL!!!!). In other words if the stock prices of chicken hatcheries is down because of bird flu (irrational reason), makes sense to average the cost down. And if price is down because the industry has been made obsolete (logical reason), don't average down (eg: pagers, CD manufacturers etc.)

I am from India and when Bird Flu struck us last year, all the hatcheries stocks tanked and there was nothing wrong with the business. It made all the sense in the world to get into hatcheries and poultry farm businesses.

2. Once it's made sure that market price is down because of some irrationality, another thing to keep in mind is upside potential. How soon can market realize that it was being irrational? For example bird flu sooner or later has to be cured and people would not stop eating chicken. Return to mean would thus happen in predictable amount of time. If in any case, return to mean takes longer than predictable amount of time, IMHO, averaging might be a bad idea. Personally I would not average down. It would be like putting more weight on a sinking ship (trying my hands at churning out one liners like WEB).

3. Finally averaging down must also consider the biggest cost of all - the opportunity cost. Averaging down is made possible only because market is down or some unrelated thing is affecting investor behavior and confidence (butterfly in New York cooks up a storm in Sahara). In these times, there could be other companies available even cheaper with higher upside potential. Better check out other opportunities before averaging down.

Please point if I am incorrect somewhere.

Tuesday 13 March 2007

SRF Ltd.

Company Details: Google Finance, Kotak Securities

Prof. Bakshi posted his views on SRF Ltd. yesterday on his blog.

Shankar asked me to look at SRF. SRF is currently trading at close to its 52 week low (CMP as on 13-MAR-07 is 120 and 52 week low is 110 on 12-MAR-07). For me this is a very important criterion in stock selection. I dont understand PE Ratios and hence I look at historical prices to see if a stock is "cheap" or not. Almost every investor would disagree with me but until I learn about PE and other ratios, I would keep using this.

The stock was cheap in first glance. Prof. Bakshi had talked about it (although it was more negative than positive) and Shankar asked me to look at it. I had to dig in. I smelled another investment opportunity.

Unaudited financial results for Dec 06 are available here and the press release is available here. It said

"SRF Q3 FY2007 revenues up 52% to Rs. 450.36 crores (vs. Q3 FY2006)" and "PAT up 418% to Rs. 70.11 crores; EPS at Rs. 10.33".
Looked like a turnaround story with huge improvements in revenues and margins.

Mr. Arun Bhagat Ram, Chairman, SRF Limited, added:
" ...The revenues and profits improved significantly by 52 % and 418 % respectively in the third quarter. Though there have been pressures on realizations and margins in our businesses, we believe our continued focus on cost efficiencies and improvement in margins will see the current businesses revert to providing healthy returns."
However there is one thing in the financial results that struck me as odd. One of the notes to results said
"The receipt of CERs (Certified Emission Reduction) income is likely to vary and may not recur from Quarter to Quarter."
When I looked at the results, I found out that income from CERs was 122.28 crores (out of total income of 450.36 crores). And this is where I had problems.

If this income of 122 crores was taken out, revenues would fall to 330 crore (compared with previous years' 296.27). Increase in just about 10%. With the economy growing at 9% and inflation at 6%, its less than average. And this income is temporary in nature and might not recur. I might be proved wrong and this income might get even more money for the company but I am not willing to bet my money on a company that doesn't make money from its core business.

Talking about the core business, SRF is majorly into
1. Technical Textiles (input for automobile tyres including aeroplanes, conveyor belts, contributes 65% of revenues before income from CERs starting coming in),
2. Chemical Business (majorly greenhouse gases and other chemicals, contributes 20% to revenues, and according to management, as these are governed by Montreal protocol, there is limited growth) and
3. Packaging Films (currently loss making business, stiff competition from domestic firms, problems with exports because of anti-dumping restrictions by EU).

These core businesses are not making any strong ripples in profitability or revenues or market expansion.

The cash flow from CERs (not permanent), the revenues and hence profitability is expected to be jittery in my opinion. CER income might dry up all of a sudden or it might start churning money - in either case, I would loose my sleep over this stock and this is unacceptable to me.

In the end, I do not have the advantage of making decision by looking into future. In view of current situations and conditions I would not want to invest into this "cheap" company.

I know I would be wrong at a lot of places. Please correct me if you happen to stumble on this post.

Wednesday 7 March 2007

HB Stockholdings Ltd

Company Details: Kotak Securities

Few facts to begin with.

Current Market Price (As on March 7, 2007): 26.75
Market Cap: 68.56 Crores

The company is in the business of investing. They try to make money by investing smart. They invest smart all right but they don't always make money (evident from last years result).

They have a huge portfolio with. Major holdings in Jaiprakash Associates Ltd and IFCI. Apart from these two they have a three page long list of stock under "investments" schedule.

Here is the interesting part. HB holds about 140 crores of Jaiprakash Associates Ltd.

If someone can buy out HB Stock and liquidate JP at current prices (although JP has taken a toll in the recent weeks), the money made would be two times the money put in. Basically its like paying 68 crores to pick up 140 or more crores. This investment has been with them for over a year and hence it's tax-free.

I somehow don't see any catches. May be am turning blind to the risk free short-term profit.

I was told that company is not making any profits and hence not lucrative. In my opinion, since HB is in the business of investments, they can't really make profits. And they shouldn't aim to make any profits at all (The power of compounding !!!!).

All they do is buy stocks and forget about them. After 5,6,7 years they wake up and suddenly realize that their holdings have turned into multibaggers. Reminds me of one Mr. Buffet ... he does essentially the same thing - buys a stock, forgets about it and one day he realizes he’s become a billionaire. And no I am not trying to compare HB to Berkshire Hathaway.

Question at the end of all remains ... Why aren't people like Jhunjhunwala, Prof. Bakshi buying this company out ...? Why cant this company be bought out and all the holdings liquidated ...? There are simply tons of wads of money on the table and its there for the taking.

And no ... I dont have any holding but yes, few friends have HB in thier portfolios.